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HSBC Global Connections Report
March 2014
Global Overview
The near-term outlook for Summary
global economic growth • Trade conditions are expected to improve over
remains patchy, suggesting the next six months according to the Trade
Confidence Index (TCI) survey, with just over
that trade will accelerate only half of respondents expecting a rise in trade.
gradually in the near term. • Over the medium term, the development of
a strong middle class in countries such as China
Economic growth is rising in the US and UK, and and India presents significant opportunities for
although the Eurozone is moving from contraction to Western brands that can establish a foothold
modest expansion, the recovery there remains slow. in these markets, as well as emerging-market
Emerging market growth may pick up from 2013 firms that can use their local knowledge to
levels but remain subdued relative to pre-crisis growth spur growth.
rates, not helped by a renewed bout of volatility in • With emerging markets targeting Research &
financial markets. Development (R&D) investment to scale the
value chain in the high-tech sector, this illustrates
Nevertheless, the underlying structural factors the need for developed economies to invest in
supporting long-run growth potential in the emerging innovation to remain competitive.
markets remain intact, underpinning our expectation that
these economies will be the key source of trade growth • We expect trade in high-tech goods to outpace
over the medium term. growth in total merchandise exports, resulting in
the value of high-tech exports increasing more
than three-fold by 2030.
Forecast data modelled by Oxford Economics,
based on HSBC Global Research macro data.
This global trade report This question is especially pertinent given the leading
role of the high-tech sector in the export-oriented
contains a special focus on industrialisation strategies of many economies in
developing Asia. The rapid specialisation in high-tech
trends in the high-tech sector. exports is most evident in China, which has grown to
become the world’s leading exporter in this sector.
We investigate whether trade But a closer look at global production networks reveals
that developing economies such as China capture only
in high-tech goods is helping a small share of the total value-added of these products
developing countries to in the global supply chain.
catch up to the industrialised This suggests that the internationalisation of supply
chains for high-tech products has in fact strengthened
nations, or whether high-tech the technological lead of companies in the developed
world. However, the economies of developing Asia
industries are helping the are now increasing their technological know-how and
moving up the value chain to develop high-tech products
industrialised nations to of their own. This suggests that there are positive
knowledge spillovers for developing economies that
retain their lead over the integrate into global supply chains. We conclude that the
emerging markets. high-tech sector therefore plays a positive role in helping
emerging markets catch up with industrialised nations.
Chart 1: Global trade by sector (2014-30)
% year growth
Beverages and Tobacco
Mineral Fuels
Food and Animals
Raw Materials
Machinery
and Transport
Chemicals
Manufactures
High-Tech
0 2 4 6 8 10
Source: Oxford Economics
Forecast data modelled by Oxford Economics,
based on HSBC Global Research macro data.
Short-term
snapshot
The TCI edged up one Chart 2: HSBC Trade confidence index (World)
point from six-months
140
earlier to reach 113 in H2
2013, signalling improved
120
confidence about near-term Positive
prospects for trade expansion 100 Neutral
amongst global businesses.
Negative
80
Although respondents from all regions reported
1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13
a positive outlook regarding international trade,
respondents in the developed economies of Europe and Source: HSBC TCI data
North America were the main drivers behind the latest
increase in optimism, while traders in the emerging
market economies of Latin America and the Middle East
were slightly less optimistic than previously. The view
of respondents in Asia remained unchanged on average
from the previous survey.
Forecast data modelled by Oxford Economics,
based on HSBC Global Research macro data.
Short-term snapshot continued
Cross-border business Chart 3: HSBC Trade Confidence Index
The economic recovery in Europe has driven a strong
141 (9)
increase in the number of survey respondents identifying
126 (-16)
it as the most promising region for trade over the next
126 (-1)
119 (-8)
118 (-4)
115 (10)
six months; Europe was chosen by 24% of respondents,
117 (2)
112 (11)
115 (4)
115 (1)
113 (-1)
109 (-13)
113 (5)
113 (1)
117
107 (-1)
108 (7)
106 (6)
up from 17% in the last survey. Nevertheless, Asia
99 (-12)
102(1)
107
100 (5)
99 (5)
103
consolidated its position as the most promising region Positive
for trade, with 42% of companies identifying it as having Negative
the best opportunities for business growth compared to
38% in the previous survey. Still, this reading should be
treated with some caution, as the survey was conducted
before the most recent bout of financial market
turbulence in the region.
Corridors of choice
UAE
India
Saudi Arabia
Indonesia
Turkey
Ireland
Brazil
Canada
Singapore
USA
Malaysia
United Kingdom
China
Mexico
Germany
Poland
Vietnam
Australia
Bangladesh
Hong Kong
Argentina
France
Egypt
World
• An improving outlook for demand globally and
in key markets was identified by respondents as
the main driver behind the expected increase in
trade flows over the next six months, with 38% Source: HSBC TCI data
of respondents highlighting these factors.
• The US dollar remains the currency of choice Opportunities for business
for international trade, with 64% of survey The latest TCI survey reveals a significant improvement
respondents identifying it as their main trade in sentiment towards the economies of Europe,
settlement currency. The euro is still firmly in underscoring the renewed confidence in the region’s
second place with 20% of respondents, whilst economic recovery. Although confidence regarding near-
the renminbi and sterling were each chosen by term trade prospects with emerging markets appears
around 3% of companies. to have held up well, the latest survey was conducted
during a lull in financial market volatility.
• Currency volatility remains the main concern for
businesses, with 43% of respondents identifying
Business strategies should look beyond temporary
it as an important constraint on growth. The
volatility and recognise the longer-run growth potential
cost of essential services (shipping, logistics
of developing economies. Our forecasts show that trade
and storage) and insufficient margins were each
routes with economies in developing Asia, in particular,
identified by close to a third of respondents as
are likely to represent some of the best opportunities for
being key impediments to trade expansion.
business growth over the medium term.
Chart 4: Most promising regions for Trade
over the next 6 months
% of respondents
50
40
30
20
10
0
Asia Europe North Middle East Latin
America and North Africa America
Source: HSBC TCI data
Forecast data modelled by Oxford Economics,
based on HSBC Global Research macro data.Long-term
outlook
Thanks in part to rising Chart 5: Growth in merchandise exports
% year growth
growth in the US and 16% 2014-16
2017-20
the UK, we expect global 2021-30
growth to pick up in 2014. 12%
With the US Fed likely to 8%
press on with ‘tapering’ its
asset purchases, potentially 4%
driving up global long-term
interest rates, emerging 0%
USA
Canada
Germany
France
UK
Ireland
Australia
China
Hong Kong
India
Bangladesh
Indonesia
Malaysia
Singapore
Vietnam
Poland
Egypt
Turkey
Saudi
UAE
Argentina
Brazil
Mexico
Japan
Korea
markets face potential
further pressures in the Source: Oxford Economics
months ahead. While there may be some short-term financial turbulence
as markets adjust to US monetary policy developments,
the fundamental drivers underpinning the longer-term
growth story for emerging markets remain intact. Over a
longer horizon, emerging markets are therefore expected
to be the key drivers of growth in global trade.
Forecast data modelled by Oxford Economics,
based on HSBC Global Research macro data.Long-term outlook continued
Corridors to watch Chart 6: Sector contribution to increase in
The value of global trade in goods is forecast to increase global merchandise exports
at an average rate of 8% pa in the years to 2030, with 120
China consolidating its position as the main driver of this
growth. Amongst the 25 key trading nations considered
in the HSBC Trade Forecast, China already accounts for
almost a fifth of total merchandise trade and this share is
80
expected to rise to above 30% by 2030.
The rapid industrialisation of China and other Asian
economies will present significant opportunities for
commodity producers to increase their focus on this 40
rapidly expanding source of demand for agricultural
and industrial commodities. And south-south trade
(trade between emerging markets) will receive a further
boost with the rapid growth in demand for consumer 0
goods that will accompany the expanding middle class 2014-16 2017-20 2021-30
in countries such as China and India. This presents
Food and animals Mineral fuels Machinery and transport
significant opportunities for Western brands that can Beverages and tobacco Chemicals Other
establish a foothold in these markets. But it also presents Raw materials Manufactures
opportunities for emerging-market firms striving to Source: Oxford Economics
become global brands, as these consumer markets are
likely to be more open to new entrants than more mature
Western markets.
At a sector level, the main drivers of growth in world
merchandise trade over the medium term are expected
to be machinery and transport equipment. In part, this
reflects the large appetite for these goods from emerging
market economies that are expanding their manufacturing
base. But it also reflects fast-growing demand from these
countries for big-ticket consumer items such as cars.
Forecast data modelled by Oxford Economics,
based on HSBC Global Research macro data.Spotlight: Technology
Developing economies have grown to dominate
trade in high-tech goods…
Over the past two decades, the developing economies This is reflected in the large share of high-tech imports
of Asia have become major players in the global market destined for developing Asian economies that also have
for high-tech goods, a trend that has also become a high share of exports in this segment (Table 2).
apparent more recently in other developing economies
such as Mexico. This rapid ascent has been led by China, Table 2: Share of total imports of high-tech goods (%)
which has seen its share of high-tech exports (amongst
the 25 economies in our sample) increase from 6% in Rank Country 2000 Country 2013
2000 to 37% in 2013 (Table 1). China has now overtaken 1 USA 20.3 HK 20.0
the EU, the US and Japan to become the largest exporter 2 Japan 15.9 USA 19.7
of high-tech goods in the world. 3 Singapore 8.3 China 17.1
4 HK 8.2 Japan 5.0
Table 1: Share of total exports of high-tech goods (%) 5 Mexico 7.1 Germany 4.3
6 China 6.9 Mexico 4.0
Rank Country 2000 Country 2013 7 Korea 6.7 Korea 3.8
1 USA 29.2 China 36.5 8 Malaysia 6.0 Singapore 3.4
2 Japan 7.0 HK 13.0 9 Germany 4.8 Canada 2.9
3 Germany 6.7 USA 9.6 10 UK 4.8 Malaysia 2.7
4 UK 6.6 Singapore 6.8 11 Canada 3.2 UK 2.5
5 HK 6.5 Japan 6.6 12 France 3.1 France 2.4
6 China 6.5 Korea 6.1 13 Ireland 2.4 India 1.9
7 Singapore 5.9 Mexico 5.7 14 Indonesia 1.0 UAE 1.7
8 Canada 5.2 Germany 4.4 15 Brazil 0.3 Brazil 1.4
9 Mexico 5.1 Malaysia 3.3 16 Poland 0.2 Australia 1.4
10 Malaysia 4.6 France 1.5 17 Australia 0.2 Indonesia 1.3
11 Korea 4.3 UK 1.3 18 Turkey 0.1 Vietnam 1.2
12 France 4.0 Vietnam 1.1 19 India 0.1 Poland 0.8
13 Ireland 1.9 Canada 0.9 20 Vietnam 0.1 Turkey 0.7
14 Australia 1.4 Poland 0.9 21 UAE 0.0 Saudi 0.7
15 Brazil 1.3 Indonesia 0.6 22 Argentina 0.0 Argentina 0.4
16 UAE 0.6 India 0.4 23 Bangladesh 0.0 Ireland 0.3
17 India 0.6 Ireland 0.4 24 Saudi 0.0 Egypt 0.2
18 Turkey 0.6 Turkey 0.3 25 Egypt 0.0 Bangladesh 0.1
19 Indonesia 0.5 UAE 0.1 Source: Oxford Economics/UN Comtrade
20 Argentina 0.5 Brazil 0.1
…but they specialise in low value-added,
21 Poland 0.5 Australia 0.1
labour-intensive stages of production…
22 Saudi 0.3 Saudi 0.1
23 Egypt 0.2 Egypt 0.0
24 Vietnam 0.2 Bangladesh 0.0
Multinational corporations have therefore been able
25 Bangladesh 0.0 Argentina 0.0
to lower production costs by outsourcing the low-skill
Source: Oxford Economics/UN Comtrade
segments of the supply chain for high-tech products to
developed nations. This raises the question whether the
It would be tempting to conclude that this surge in high-tech sector is helping developing countries to catch
high-tech exports reflects a move into high value- up to the industrialised nations, or whether the high-tech
added exports through the rapid development of local sector is actually helping the industrialised nations to
technological capabilities in these economies. However, retain their lead over the emerging markets.
the majority of this growth actually reflects the increased
internationalisation of supply chains. More specifically, The link between exports and imports of high-tech
multinational companies have increasingly outsourced the goods is illustrated in Chart 7. For the 25 economies in
labour-intensive assembly stages of production to lower- our sample, the chart compares the share of high-tech
cost developing economies; meanwhile, the technology- exports in that country’s total trade (exports + imports)
intensive and higher value-added stages of production with the share of high-tech imports in total trade. The
have remained concentrated in developed nations. 45-degree line in the chart shows the point at which there
Forecast data modelled by Oxford Economics,
based on HSBC Global Research macro data.Spotlight: Technology continued
is balanced trade in high-tech goods – countries above Although Hong Kong appears to have an especially high
this line have a trade surplus in these products, while propensity to trade in high-tech goods, its position of
countries below the line have a trade deficit. near-balanced trade in these products reflects its role
as a regional trading hub. This entrepôt role also helps
Chart 7: Exports and imports to explain why the more developed Asian economy of
of high-tech goods (2012) Singapore has such a high specialisation in the trade
of high-tech goods, although Singapore is also a major
High-tech exports (% of total imports and exports)
30 producer of high value-added electronic components
HK
such as semiconductors, explaining its trade surplus in
25 in this sector. Korea and Japan also have significant roles
de
d tra od s in the production of high value-added components that
ce go
20 CHN MYS lan c h are shipped for assembly elsewhere in the region.
Ba h -te
g
SGP hi
15
MEX At the same time, this internationalisation of supply
KOR VNM
10
chains explains why the United States – the designer of
devices such as the iPhone and a country with an evident
JPN
5
IRL POL
DEU
USA
comparative advantage in the high-tech sector – operates
TUR
IDN
FRA
CHN a trade deficit in these goods. The outsourcing of
EGY CAN
0 SAU
IND
BGD ARG
BRA
UAE
production of high-tech goods by US companies to serve
0 5 10 15 20 25 30
the large domestic consumer market for these goods
High-tech imports (% of total imports and exports)
means that US companies import a large quantity of
assembled products that they have designed themselves.
Source: Oxford Economics / UN Comtrade
Developing economies can benefit from knowledge
…as evidenced by their high propensity to import spillover effects…
high-tech goods Outsourcing of labour-intensive production by large
multinational corporations can therefore explain the
China operates a trade surplus in high-tech goods, which leading role of developing countries in high-tech exports.
undoubtedly represents a net positive for the economy. Indeed, official data from China’s Ministry of Science and
Nevertheless, the size of this surplus is perhaps not as Technology shows that 82% of the country’s high-tech
large as one may have expected given the country’s exports were produced by foreign-owned or joint-venture
apparent dominance of international exports in this firms in 2011 (Chart 8).
segment. A similar pattern of trade can be observed in
Malaysia, which also has a high export specialisation Chart 8: China’s exports of high-tech products
in high-tech products, largely generated by domestic by firm ownership
assembly lines. Vietnam is more of a latecomer to the Share of high-tech exports (%)
high-tech sector, but it is now becoming an increasingly 100 Joint-venture
significant producer of telecommunications equipment Foreign-owned
following major investments in processing factories by
multinational corporations. Outside Asia, Mexico has also 80
recently received significant investment in manufacturing
facilities by foreign companies seeking to outsource 60
labour-intensive assembly.
40
20
0
2002 2005 2008 2011
Source: PRC Ministry of Science & Technology
Forecast data modelled by Oxford Economics,
based on HSBC Global Research macro data.Spotlight: Technology continued
It may appear that the emerging markets are merely Chart 10: Expenditure on Research
helping to strengthen the technological lead of companies and Development
in the developed world. However, this overlooks the % GDP
potential for knowledge spillovers from foreign firms.
Moreover, these developing economies are now making Indonesia
Saudi Arabia
rapid advances in developing their domestic research Vietnam
Egypt
capabilities, with rates of R&D expenditure in Developing Mexico
Asia now fast-approaching the levels seen in the West Argentina
Hong Kong
(Chart 9). This reflects both the rapid growth of R&D in India
Poland
the region, as well as the near-stagnation of R&D levels Turkey
in the US and EU over the past two decades. Malaysia
Brazil
Canada
Ireland
Chart 9: R&D expenditure trends United Kingdom
% GDP China
Singapore
3 France
North America Australia
USA
Germany
Japan
Korea
European Union
2
0 1 2 3 4
Source: World Bank – World Development Indicators
Developing Asia
1
This shift is further evidenced by the rise of
Chinese brands such as Huawei (the world’s largest
Latin America telecommunications equipment maker), Haier (the
largest white-goods manufacturer), Lenovo (the second
0 largest PC manufacturer) and BYD (the leading producer
1996 1999 2002 2005 2008 2011
of lithium-ion batteries for mobile phones). A common
Source: World Bank – World Development Indicators
strategy employed by all these brands is that they initially
used their local knowledge to focus sales efforts on
...and they are rapidly developing their own emerging markets before expanding further afield to
technological capabilities… compete with established Western competitors.
Examining current levels of R&D spending at the It is very likely that this progression from assembly
country level, Chart 10 reveals that China now compares lines to the domestic design and production of high-
favourably with many developed nations. Similarly, tech products has been aided by knowledge spillovers
Malaysia has also managed to increase R&D from very from foreign invested firms. Indeed, an analysis of the
low levels just a few years ago. These two economies emerging market economies in our sample reveals a
may have depended on foreign investment to fuel their positive relationship between growth in high-tech imports
early growth in high-tech exports, but they are now and growth in GDP over the past two decades (Chart
increasing their technological know-how and moving up 11). This relationship does not appear to exist for the
the value chain to develop high-tech products of their developed economies in our sample, where the scope
own. This investment appears to be paying dividends for such knowledge spillovers is much more limited.
– after the US and Japan, China now ranks joint-third
alongside Germany in terms of the number of PCT
applications filed each year.
Forecast data modelled by Oxford Economics,
based on HSBC Global Research macro data.Spotlight: Technology continued
Chart 11: Technology imports and GDP Table 3: Share of total exports of high-tech goods (%)
25
Emerging markets Rank Country 2013 Country 2030
High-tech imports (CAGR (%), 1992-2012)
Developing economies
1 China 36.5 China 51.1
20 2 HK 13.0 HK 10.1
VNM
IND CHN
.5
3 USA 9.6 USA 6.6
0
²=
15 POL
R 4 Singapore 6.8 Korea 5.7
BAN
BRA
HK
IDN
5 Japan 6.6 Mexico 4.5
UAE
KOR
6 Korea 6.1 Singapore 4.5
10 MEX
JPN
TUR MYS 7 Mexico 5.7 Japan 4.0
USA SAU
R² = 0.0 AUS
8 Germany 4.4 Malaysia 3.7
CAN EGY SGP
5 GER FRA ARG
9 Malaysia 3.3 Germany 2.3
IRE
UK 10 France 1.5 Vietnam 1.8
0 11 UK 1.3 Poland 0.9
0 2 4 6 8 10 12 12 Vietnam 1.1 France 0.8
GDP (CAGR (%), 1992-2012) 13 Canada 0.9 Indonesia 0.8
Source: Oxford Economics / Haver Analytics
14 Poland 0.9 UK 0.8
15 Indonesia 0.6 India 0.8
…which will enable them to move up the value chain 16 India 0.4 Canada 0.6
in high-tech goods 17 Ireland 0.4 Turkey 0.5
Looking forward, we expect trade in high-tech goods to 18 Turkey 0.3 Ireland 0.3
continue to outpace growth in total merchandise exports, 19 UAE 0.1 Brazil 0.1
increasing its share of total goods traded from 22% in 20 Brazil 0.1 UAE 0.1
2013 to over 25% by 2030. Internationalisation of supply 21 Australia 0.1 Australia 0.1
chains will explain much of this trade, we do not expect 22 Saudi 0.1 Saudi 0.1
it to be driven solely by Western brands, as emerging- 23 Egypt 0.0 Egypt 0.0
market firms will continue to gain market share. These 24 Bangladesh 0.0 Bangladesh 0.0
factors will combine to make global trade in high-tech 25 Argentina 0.0 Argentina 0.0
goods even more skewed towards developing Asia in the Source: Oxford Economics/UN Comtrade
years ahead (Table 3). Conclusion
The preceding discussion leads us to conclude that the
high-tech sector has a positive influence on growth in the
emerging markets and helps them to catch up with the
industrialised nations. While developed countries have to
continue innovating to stay ahead, developing economies
can also benefit from knowledge spillovers to catalyse
local production. And while levels of R&D in North
America and Europe are stagnating, rapid growth rates in
emerging markets are creating home-grown competitors
in the high-tech sphere that are now threatening the
dominant position of established Western brands.
More generally, the example of the high tech sector
illustrated here presents lessons for other sectors and
the future pattern of global trade. The world economy is
becoming more knowledge-intensive and it is essential
for developed nations to invest in research, innovation and
education to retain competitiveness and enhance future
growth. Technological know-how is helping developed
countries to retain their lead over the emerging markets,
but without the appropriate investment, this lead will
gradually be eroded over time.
Forecast data modelled by Oxford Economics,
based on HSBC Global Research macro data.About the Data: About the HSBC Trade Confidence Index:
About the HSBC Trade Forecast – Modelled by Oxford Economics The HSBC Trade Confidence Index is conducted by TNS on
Oxford Economics has tailored a unique service for HSBC which behalf of HSBC in a total of 23 markets, and is the largest trade
forecasts bilateral trade for total exports/imports of goods, based confidence survey globally. The current survey comprises six-
on HSBC’s own analysis and forecasts of the world economy to month views of 5,550 exporters, importers and traders from small
generate a full bilateral set of trade flows for total imports and and mid-market enterprises on: trade volume, buyer and supplier
exports of goods, and balances between 180 pairs of countries. risks, the need for trade finance, access to trade finance and the
Oxford Economics produces a global report for HSBC, as well as impact of foreign exchange on their businesses. The fieldwork
country specific reports on the following 23 countries: Hong Kong, for the current survey was conducted between November –
China, Australia, Indonesia, Malaysia, India, Singapore, Vietnam, December 2013 and gauges sentiment and expectations on trade
Bangladesh, Canada, USA, Brazil, Mexico, Argentina, UK, France, activity and business growth in the next six months.
Turkey, Germany, Poland, Ireland, UAE, Saudi Arabia, and Egypt.
The analysis also includes trade with Japan and Korea for a total Technology Focus – Methodology
sample of 25 key trading nations. This report focuses on how emerging markets are targeting
R&D investment to scale the value chain in the high-tech sector,
Oxford Economics employs a global modelling framework that illustrating the need for developed economies to invest in
ensures full consistency between all economies, in part driven innovation to remain competitive. For this analysis, we collected
by trade linkages. The forecasts take into account factors such together four key high-tech sub-sectors into one group:
as the rate of demand growth in the destination market and the
exporter’s competitiveness. Exports, imports and trade balances • Office machines and automatic data-processing
are identified, with both historical estimates and forecasts for machines (SITC code 75)
the periods 2014-16, 2017-20 and 2021-30. Sectors are classified • Telecommunications equipment (SITC code 76).
according to the UN’s Standard International Trade Classifications
• Electrical machinery and appliances (SITC code 77)
(SITC) system at the two-digit level and grouped into 30 sector
headings. More information about the sector modelling can be • Photographic apparatus and optical goods (SITC code 88)
found on http://www.globalconnections.hsbc.com/
Based on the same underlying forecasts used for the existing
analysis of trends in bilateral trade flows, the report examines how
exports/imports of this group of products are expected to evolve
over time.
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